A European technology group had identified a high-growth Israeli software company as its preferred acquisition target. The group's existing holding structure was built for EU operations. It had no presence in Israel and no established position under Israeli tax legislation. The window for closing the deal was tight. Choosing the wrong entry vehicle risked triggering substantial corporate income tax and withholding tax exposure – costs that would have erased a significant portion of the projected return.
Structuring inbound investment in Israel requires careful alignment of corporate form, tax residency, and applicable tax treaty relief before any transaction closes. Israeli tax legislation imposes corporate income tax on locally sourced profits and withholding tax on dividends, interest, and royalties remitted to foreign shareholders. The right holding structure – selected and documented before deal completion – can reduce this exposure materially and support efficient repatriation of returns.
This case study examines how Ferraz & Whitmore advised the client through structure selection, treaty analysis, and implementation, and draws out three lessons applicable to similar cross-border investment mandates.
Client profile and the challenge
The client was a mid-market European technology holding company. It had subsidiaries across three EU member states but had never previously invested in the Middle East or in Israel specifically. The proposed acquisition involved taking a majority stake in an Israeli operating company with active local revenues and a workforce based in Tel Aviv.
The immediate challenge was structural. The client's existing EU parent entity lacked a tax treaty position that would reduce Israeli withholding tax on future dividend distributions. Routing the investment directly through the existing parent would have created an inefficient repatriation path. Beyond dividends, the group also intended to license intellectual property to the Israeli entity – generating royalty flows that carried their own withholding tax exposure under Israeli tax legislation.
A secondary concern was permanent establishment risk. Several of the group's senior executives were expected to spend extended periods in Israel during the integration phase. Without careful structuring of their roles and authority, Israeli tax authorities could characterise the parent as having a permanent establishment in Israel. That characterisation would have brought additional corporate income tax obligations and reporting requirements.
For a detailed breakdown of the Israeli corporate tax and regulatory environment applicable to foreign investors, see our overview of tax law in Israel.
Legal strategy: structure selection and rationale
The core recommendation was to interpose a purpose-built intermediate holding company in a jurisdiction with both a favourable tax treaty with Israel and a well-developed corporate law system. The intermediate entity would hold the Israeli shares and receive dividend and royalty flows before onward distribution to the European parent.
Treaty selection was the pivotal decision. Israeli tax legislation gives effect to a network of bilateral tax treaties. The applicable treaty needed to reduce withholding tax on dividends to the lowest available rate and provide comparable relief on royalty payments. The treaty also needed to contain provisions on tax residency that would reliably protect the intermediate holding from conflicting residency claims by Israeli or other tax authorities.
Permanent establishment risk was addressed through two measures. First, the executives travelling to Israel were given clearly defined advisory roles with no contracting authority on behalf of the parent or the intermediate holding. Second, the group's decision-making processes were restructured so that binding commercial decisions were documented as having been taken outside Israel. This required adjustments to board procedures and written evidence trails – unglamorous but essential work.
The intellectual property licensing arrangement was structured separately. Royalty rates were benchmarked against arm's-length comparables to withstand scrutiny under Israeli transfer pricing rules, which are embedded in the broader body of Israeli tax legislation and closely follow OECD guidelines in practice.
The group's corporate governance structure for the Israeli subsidiary is covered in our separate analysis of corporate law in Israel.
Key milestones and complications encountered
The implementation unfolded across approximately four months. The first milestone was finalising the jurisdiction selection for the intermediate holding and incorporating the vehicle. This took six weeks, including local regulatory clearances and the drafting of the shareholders' agreement governing the Israeli acquisition.
The most significant complication arose during due diligence. The Israeli target had previously received grants from a government technology authority. Those grants carried restrictions on transferring ownership of the funded intellectual property outside Israel. A change-of-control transaction risked triggering repayment obligations or requiring advance approval from the relevant authority. The deal timetable had not initially accounted for this process, and securing approval added approximately three weeks to the timeline.
A second complication involved the royalty structure. The Israeli tax authority's advance ruling process – which can provide certainty on withholding tax treatment – was not completed before closing. The parties therefore proceeded with a conservative withholding tax rate on royalties, with a contractual mechanism to adjust payments once the ruling was issued. Ruling processes in Israel can take several months. Building that contingency into the commercial terms at the outset was essential to avoid later disputes between the parties.
For context on how comparable holding structures have been approached in neighbouring high-growth markets, see our related case study on inbound investment structure in the UAE.
To explore how a similar structure could apply to your investment in Israel, contact us at info@ferrazwhitmore.com.
Transferable lessons for cross-border investors
Lesson one: treaty position must be established before – not after – deal signing. The choice of holding jurisdiction determines the withholding tax rate on every future distribution. Changing the structure after signing is costly, time-consuming, and may trigger additional tax events. Investors who treat holding structure as an afterthought routinely forfeit treaty benefits that were available to them from day one.
Lesson two: permanent establishment analysis is not a formality. Personnel movements between a foreign investor and a newly acquired local business are common during integration. Without documented controls on contracting authority and decision-making location, those movements can create unintended tax residency or permanent establishment exposure under Israeli tax legislation. The risk is particularly acute when senior executives hold dual roles in both the parent and the local entity.
Lesson three: regulatory consents tied to government grants deserve early-stage attention. Israel's technology sector benefits from substantial public funding through grant programmes administered by government authorities. Those programmes routinely attach conditions to any transfer of ownership or licensed technology. A lawyer in Israel with sector-specific knowledge will identify these conditions during due diligence. Discovering them at a late stage – after commercial terms are fixed – sharply reduces negotiating flexibility and can delay closing. Engaging a law firm in Israel with technology sector experience at the outset avoids this outcome.
About Ferraz & Whitmore
Ferraz & Whitmore is an international law firm based in Lisbon, advising business clients across 46 jurisdictions. Our team combines Portuguese civil law expertise with English common law tradition to deliver cross-border legal solutions in tax structuring and inbound investment advisory. The firm's tax law practice covers jurisdictions across Europe, the Middle East, and Asia-Pacific, supported by a network of local counsel with direct experience before relevant tax authorities, including in Israel. Our attorneys have advised on inbound investment and holding structure matters across both civil law and common law systems. Ferraz & Whitmore is a member of leading international legal associations and participates in cross-border practice groups focused on tax and corporate matters. To discuss your investment structure in Israel, contact us at info@ferrazwhitmore.com.
Disclaimer: This publication is provided for informational purposes only and does not constitute legal advice. The information herein should not be relied upon as a substitute for professional legal counsel tailored to your specific circumstances. Ferraz & Whitmore assumes no liability for actions taken or not taken based on the contents of this material. For advice regarding your particular situation, please contact info@ferrazwhitmore.com.